Treasurys get boost from retail, Iraq

RachelKoning

NEW YORK (CBS.MW) - Evidence retail sales improved only on back of auto demand rallied the bond space Tuesday as investors grew more convinced a slow recovery would keep the Fed from lifting interest rates for awhile.

Gains for government debt came despite a reversal higher for the broader stock averages, defying the typical divergence between stocks and bonds.

Already, safe-haven Treasurys were firmer early in the session, following a BBC interview of U.N. weapons inspector Hans Blix. Blix said his team has found large quantities of illegal materials in Iraq, but he admitted it was too early to determine whether these materials are related to weapons of mass destruction. Blix is due to submit an initial report on the inspections to the U.N. Security Council on Jan. 27.

While bonds have started the year with a defensive bent, lingering geopolitical uncertainty has prevented the bottom from falling out of the market.

The market remains so sensitive to the latest developments on Iraq even far-fetched rumors tend to have some impact on trading.

Tuesday's rumors du jour suggested Iraq had asked the inspectors to leave. The United Nations denied this report. Speculation that Saddam Hussein might seek exile also filtered into trading, but that too was eventually dismissed as unfounded.

At the 3 p.m. U.S. close, a 10-year Treasury note rose 10/32 at 99 11/32 to yield
TNX, -0.73%
4.08 percent, down from 4.12 percent. Benchmark yields hit five-week highs over 4.19 percent on Monday, a reflection of investor preference for riskier asset classes, such as corporate bonds. Corporate bonds have been sold and bought aggressively in the early weeks of the year, spurred by expectations the economy and profits will improve.

A 30-year bond added 13/32 at 105 21/32 to yield
TYX, -1.20%
5.00 percent, down from 5.01 percent. A 2-year note rose 2/32 at 100 even to yield 1.74 percent, down from 1.79 percent. A 5-year note advanced 7/32 at 99 26/32 to yield 3.04 percent, down from 3.09 percent.

Expectations for upbeat Intel news tugged tech stocks higher and the broader averages came along for the ride. See Market Snapshot.

The U.S. dollar earlier fell to fresh multi-year lows versus the euro and to a four month low against the Japanese yen amid the weak retail sales data.

The buck is down 0.5 percent versus the euro at $1.0590, rebounding slightly from an intraday low of about $1.0605, a level not seen since October 1999. Against the yen, the dollar is losing 1 percent to 117.75, the lowest level seen since Sept. 5, 2002.

Driven by auto sales

The retail sales increase was the biggest gain in five months. Car dealers brought back many of the incentives they had suspended earlier in the year.

"Note that December non-auto sales were depressed by the food component, which fell 1 percent, reversing November's increase. This is noise, and tells us nothing about the economy," said Ian Shepherdson, chief U.S. economist with High Frequency Economics.

"Stripping food and gasoline sales from the non-auto numbers, our measure of core sales rose 0.2 percent -- not great, but not too bad, especially when viewed in the context of the drop in consumers' expectations indexes through the fall. With stocks recovering, the outlook is for stronger sales," he said.

"This extremely sluggish performance over the last two months is of concern, as it could potentially signal that consumer spending is beginning to falter," said Jade Zelnick, senior economist with RBS Greenwich Capital "Such a conclusion, however, is premature since the frenzied pace of auto purchases last month indicates that consumers were still willing to binge on big-ticket items and enter into long-term financial commitments -- though they clearly remain extremely price-conscious."

"In any case, the sharp advances in total retail sales in November and December should be sufficient to keep Fed policy on hold at the FOMC meeting later this month, though officials are unlikely to find the data particularly reassuring and will need to continue to monitor consumer activity closely," she said. Read more on the retail sales report.

Intraday Data provided by SIX Financial Information and subject to terms of use. Historical and current end-of-day data provided by SIX Financial Information. All quotes are in local exchange time. Real-time last sale data for U.S. stock quotes reflect trades reported through Nasdaq only. Intraday data delayed at least 15 minutes or per exchange requirements.